Iraq's oil minister calls for swift action on contracts

Iraq calls on foreign energy companies, such as BP, Eni and China National Petroleum Corporation (CNPC) to move swiftly to implement their recently awarded contracts

Iraq's oil minister Hussain al-Shahristani has urged foreign energy companies to honour their contracts to explore and develop oil reserves in Iraq, as it is the "the nation's highest priority."

"You have to prove to us and to the world, your ability to implement these contracts in accordance with the timeframe and the conditions stipulated in the deals," said Al-Sharistani speaking at an oil symposium in Iraq. "Success is not only reaching the production targets, but reaching these targets at a lesser cost, as much as possible. I hope we work together to reduce the costs."

The call comes amid concerns that many international firms are moving too slowly to explore and develop the 11 oil fields they won in two-round auctions.

In the past two years, consortia led by major energy companies have waded into Iraq, signing producing field technical service contracts (PFTSC) to secure fields for crude oil production. Some of these are pledging production of around 1 million b/d by 2017, a seemingly tall order for a country with high political uncertainty.

A PFTSC was developed by the Iraqi Ministry of Oil to be used for the first bid round. It is a hybrid model contract to be added to more than 100 fiscal regimes that govern international oil companies' participation in some 75 countries.

Targets unrealistic

The Iraqi government has stated that it sees oil capacity increasing from 2.5 to 10–12 million barrels per day (b/d) over the next decade, after the round of signed contracts from foreign energy companies. However, market experts have revealed that this output level is impossible and actual production will fall far short of official stated targets.

"The amount of oil Iraq is proposing to deliver to the market is impossible," said Peter Wells, director of oil and energy product and technology modeller Neftex Petroleum Consultants, speaking at the Centre for Global Energy Studies in London. "It is spreadsheet trickery because if you look at what it says on paper, in terms of reserves, compared with the maturity of the fields, the figures do not add up. The reserves are tired."

Wells predicts that, while the bid target for one of Iraq's largest oil fields, Rumaila, stands at 2.85 million b/d over the next 10 years, hit will only produce 1–2 million b/d.

Wells also forecasts the West Qurna oil field will produce 2 million b/d, well below the estimated 4.125 million b/d bid target.

Meanwhile, experts also stressed the need for Iraq to develop an oil law and expressed concern over the number of companies operating under contracts with no firm legal basis. They believe this backdrop could lead to a prolonged stall in oil supply.

"An oil-sharing law is the fundamental building block for Iraq to move its oil supply forward," says Ashti Hawrani, minister for natural resources at the Kurdistan regional government. "The issues have changed over the years and in 2010 the focus is on who gets a slice of the oil revenue and when."

Crescent's Jafar also sees this as the key issue to be addressed.

"We have many companies that signed a bunch of contracts before an oil law has even been put in place," he says. "I guess the companies felt they had to get involved because everyone else was getting involved. However, we now have chaos, as the contracts have no legal basis."

In 2008, Iraq's crude oil production under the control of the regional state-owned oil companies averaged 2.4 million b/d, up from its 2007 production of 2.1 million b/d, according to the US Energy Information Administration. This is still below its pre-war production capacity level of 2.8 million b/d in 2003.